Private renting, quality concerns and spatial exclusion

To say that there appears to be inconsistency, incoherence or complacency at the centre of Government policy is not a particularly novel observation. Indeed, it doesn’t really narrow down what we’re talking about, given the generally rushed and badly thought through nature of current policy proposals in many fields. Nonetheless the point reasserted itself with the conjunction of two pieces in yesterday’s Observer (here and here).

A perennial problem in the private rented sector is relatively poor affordability coupled with relatively poor quality. Many private renters pay a lot for bad housing. It has been an active part of the housing policy discussions for the last 15 years at least. The Buy to Let boom of the 2000s made a difference to average quality, but not to affordability.

The fundamental issue is that landlords in Britain are unwilling or unable to provide consistently high quality accommodation for the level of rent that private tenants are willing to pay or, at the bottom of the market, able to pay.

There are several strands of current policy and broader context affecting the private rented sector. These include:

Changes in the way the Local Housing Allowance is calculated in order to restrain the level of assistance available to low income households. The LHA will also be subject to a weekly maximum and changes to disregards and allowances.

Proposals to allow local authorities to discharge homelessness duties into the private rented sector, without the applicants’ consent.

Reductions in Supporting People funding will result in more people with chaotic lifestyles living in the community without appropriate levels of support or the breakdown of more tenancies because the tenant is unable to live independently without support.

Broader constraints on the availability of mortgage finance meaning that households are being obliged to rent privately for longer. Some are choosing to stay in the private rented sector as a result of the perceived riskiness of owner occupation.

Deterioration in the broader economic environment means that fewer people are able to afford owner occupation, even if mortgages are available, and rising redundancies will mean that more people are unable to sustain owner occupation, even if only temporarily.

Yesterday’s Observer carried a report drawing on the recent English Housing Survey which indicated that some 40% of the properties in the private rented sector did not meet the Decent Homes Standard. And that is before the changes in LHA reduce the resource available to tenants.

The paper also reported on some modelling work for Shelter and the Chartered Institute of Housing which indicated that within ten years a third of local authorities would be unaffordable to those on the Local Housing Allowance, if it is reformed in the way the Government currently proposes. The point here is not so much that the basis for the LHA is being switched from the 50th percentile to the 30th percentile of local reference rent, which in itself will reduce affordability unless rents drop sharply. The key point is that the basis for uprating is changing to CPI, which will typically produce smaller increases than the current mechanism (the change is similar to the switch from RPI to CPI for many other benefits). The methodology used to draw up these estimates could be debated. Yet the broad point that over the long term this change will be of considerable significance would still stand. If available assistance progressively falls further behind prevailing rent levels then this is largely a matter of arithmetic. This outcome would not be good for social mix and social cohesion. Nor would it be good for local economies: to continue to function even high cost areas such as London require a strata of workers willing and able to work for low wages.

It might be argued that if tenants have fewer resources at their disposal as a consequences of restraints in the levels of LHA then landlords will have to accept lower rents. This is the government’s belief. However, it rests on the key assumption that the supply curve for private rented housing for benefit-dependant households is effectively vertical; therefore all the LHA does is inflate prices. That seems an incautious general assumption. It is likely that some landlords will be willing to accept lower rents. But others are likely to exit the market or relet properties to other segments of the market – to households who are not dependant on the LHA. (I discussed these issues in a bit more detail a while ago here.) That will lead to shortage in the benefit-dependent segment of the market and limited decline in prevailing rents. It will more likely squeeze tenants’ post-housing income to even lower levels.

One problem with some of the economic reasoning that underpins some policy thinking in the housing field is the failure to recognise that housing is not like other goods in the sense that few people see opting out of the market completely as a realistic option. Given that most people will feel obliged to consume at least some housing, in most areas there will be demand for all but the poorest accommodation. So market discipline is going to be less strong than it might be for other goods and services.

The overall result of the current drivers in the private rented sector will be an increase in demand from low income households, and turnover in parts of the market, while at the same time reducing the resources available to assist them in securing adequate housing.

The most likely result of these changes is a recoupling of housing quality to income – a further decline in the quality of housing available to poor private renters.

The Observer pieces call for the issue of greater regulation of the private rented sector to be revisited. I agree with that in the abstract. But at a more practical level there is a danger that this will lead to an increase in housing costs as landlords try to pass the costs of compliance on to tenants. Is it better or worse for tenants and prospective tenants to face poor quality but affordable rental accommodation or better quality but unaffordable accommodation in short supply? The question admits to no straightforward answer.

Policy in this area is a mess. There is an urgent need for some hard thinking. Some of the possible futures that flow from current policy directions look highly problematic.

Better regulation is needed but it shouldn’t be the next step, even if Government were so inclined. Policy needs first to examine the normative context and landlords’ self-understanding. Effectively what is required is not only for landlords’ professionalism to be increased but also for them to reconceptualise what constitutes appropriate rates of return from their investments. Then the costs of regulation are absorbed in reduced rates of return rather than quality degradation. One might argue that this strategy would be even more challenging in the current context because weakness in the housing market means that landlords will be looking for the return from their investment from rental income rather than capital growth.

If that strategy is not politically feasible then it is even less likely that Government will approach the problem from the other end: there are credible arguments that the real problem is the reliance of the UK on low wages and relatively meagre out of work benefits. It is this that creates the widespread reliance on the LHA in the first place.